Bank of England deputy: Likely rise in U.K. wages

JasonDouglas

Wages in the U.K. may soon start to pick up, but any quickening in pay growth could be held back by weak productivity growth and an expanding workforce, according to one of the Bank of England's top officials.

Ben Broadbent, the BOE's deputy governor for monetary policy, said in remarks prepared for delivery Saturday at the Federal Reserve Bank of Kansas' annual conference in Jackson Hole, Wyo., that survey data and skills shortages in the U.K. indicate wage growth may soon begin to rise.

His speech suggests he sees no great hurry to raise U.K. interest rates, assuming inflationary pressures remain subdued. He didn't discuss the outlook for monetary policy in detail.

Average earnings in the U.K. rose at an annual pace of just 0.6% in the three months through June, excluding bonuses, the feeblest pace of growth on record, according to official figures.

"Some of this weakness could be unwound later in the year," Mr. Broadbent said. But he added pay growth may rise slowly, citing a protracted period of poor productivity growth and signs that Britain's workforce is getting bigger, both of which tend to keep a lid on wages. Moreover, recent sluggishness in wage growth may mean that Britons "have become adapted to lower pay awards," he added.

BOE officials led by Gov. Mark Carney have increasingly focused on labor-market signals such as pay growth to judge when to raise short-term interest rates in the U.K. The BOE's benchmark rate has been pinned at 0.5% since March 2009--the lowest level in the central bank's 320-year history.

The BOE this month halved its forecast for pay growth in 2014 in response to many of the factors Mr. Broadbent described. Mr. Carney signaled that evidence of a durable recovery in pay growth will be a key factor in determining when the BOE lifts rates.

Investors expect BOE officials to start raising the central bank's benchmark interest rate early next year. Two officials on the BOE's nine-member policy committee pushed to raise the BOE's benchmark rate to 0.75% this month but were rebuffed by their colleagues, who argued that tightening policy now would be premature. Mr. Broadbent voted with the majority.

The bulk of his remarks focused on why BOE officials zeroed in on the labor market over the past year. Mr. Broadbent said officials are keeping watch on a range of indicators to determine when to increase borrowing costs but that labor market data offers "a better steer" than output growth alone on how much slack there is in the economy keeping price pressures at bay.

He acknowledged this approach isn't without cost. Labor market data can be a less timely source of inflationary signals than other economic variables, he said.

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